Abstract
Restaurants can improve the quality and reliability of their input supplies and gain favor with consumers through direct sourcing while also contributing to development goals around sustainable production and income generation. However, limited evidence exists on the willingness of restaurants to invest in direct sourcing, the implications of these linkages, and the options to achieve scale. We interviewed 46 restaurants to examine their preferences and experiences in sourcing local foods and analyzed three cases that link local production to the tourist sector in Cusco, Peru. Results suggest that the interventions succeeded in providing a few restaurants with high value food. However, the interventions failed to deliver impact at scale. Bottlenecks included low business capacities in farmer organizations, limited support from NGOs and the government, and weak incentives for restaurants. We conclude with a discussion on the changes needed in the business and policy environment for achieving greater impact at scale.
Introduction
Short food chains for sustainably produced products offer an important opportunity for restaurants to offer tourists an authentic experience as well as a signal to socially conscious consumers of their commitment to support rural communities and sustainable production practices. Deeper insights into designing interventions and the bottlenecks faced in implementation of these linkages are critical to engage directly and extensively not just with smallholder famers but also with processors, consumers, and government agencies that support them. These factors have come together to influence the development of these linkages between smallholders and tourist restaurants in Cusco, Peru, a major tourist destination in Latin America with some success. In this article, we provide insights into how these interventions can better meet the needs of the restaurants for the products and services they desire while enhancing the positive impacts received by participating smallholder household and increasing the number of households benefited both directly and indirectly in the context of a middle-income country. Although earlier studies focused on either demand or supply challenges, our study examine the effects of these linkages both from the perspective of the restaurant managers and their suppliers, often smallholder farmers. Even fewer have examined this relationship in middle income and developing countries. This more extensive analysis allowed us to better understand entirety of these short chains and what actions can be taken to benefit both the restaurants and rural communities while meeting the expectations of the customers.
Researchers, most in North America and Europe, have highlighted the growing consumer demand for locally produced, organic foods and overall higher quality foods, including attributes such as nutritional value, freshness, safety, and taste. However, they have not examined how these changing demand preferences have had on local farmers. Several have shed light on consumer expectations and demand for locally produced food products, as well as the factors that shape access to and demand for locally produced foods (Arsil et al., 2014; Greenberg, 2017; Si et al., 2015). In addition to taste, factors such as environmentally friendly production practices and support for local farmers have caught the attention of restaurant patrons, who have indicated a willingness to pay a price premium for these products (Frash et al., 2015; Schneider and Francis, 2005). Similarly, a study in Cusco also demonstrated that consumers were willing to pay more for local food products (Blare et al., 2019). Research in North America has also examined this expanding tourist movement that seeks out cuisine made from local products in restaurants and resorts. This trend referred to as “culinary tourism” has taken off with restaurants offering traditional dishes made from local products in well-known tourist attractions like Nigeria Falls or lesser-known destinations like rural Wisconsin, Colorado, and Ontario (Green and Dougherty, 2008; Smith and Xiao, 2008; Starr et al., 2003; Telfer, 2000).
Looking at the large-scale, often internationally owned, hotel sector in the Global South, researchers have explored the potential opportunity for smallholders to supply directly fresh agricultural products. The interest recognizes that international tourism plays a vital role in domestic economy, and the development of backward linkages with farmers can reduce foreign exchange leakages, while providing a boost to efforts to promote growth of the agricultural economy. For hotels, sourcing from smallholders offered a chance to reduce their input costs and their dependence on relatively expensive imported ingredients. Over the last 20 years, donors, UN agencies, NGOs, the private sector, and governmental economic development agencies have supported interventions aimed at building commercial links between hotels and local farmers, with particular interest in small island states (Du Rand and Heath, 2006; Okumus et al., 2013). Although these studies have focused on what steps restaurants can take to source from smallholders, they did not examine the perspective of their suppliers and their obstacles in building these relationships.
Researchers have highlighted various challenges to sustain direct sourcing schemes and achieve impact at scale. Sourcing arrangements with farmers tended to be limited in scope with a few farmers supplying a few, normally just one, large business, and there was limited capacity for innovation in the commercial relationships when issues began to arise (Meyer, 2006; Telfer, 2000). They faced challenges to sustain and grow operations over time including logistical difficulties in coordinating deliveries, poor transportation and communication infrastructure, limited social and financial capital, high marketing costs, finicky consumer demand, and weak business leadership and farmer organization (Dunne et al., 2011; Freidberg and Goldstein, 2011; Martinez et al., 2010; Stephens, 2021). Moreover, local sourcing has been seriously impeded by problems with production (i.e., farmers producing in-demand products in sufficient volume), distribution, reliability, and lack of information (Curtis and Cowee, 2009; Inwood et al., 2008; Schneider and Francis, 2005; Starr et al., 2003).
Interest has started to re-emerge related to the potential of the tourism sector to engage local farmers, in response to the overall growth of tourism in many parts of the Global South, and the increased interest in food and dining as part of this trend (Deere and Royce, 2019; Mak et al., 2012; Sims, 2009). An important question is whether the fast growth of the tourism sector, combined with an overall increase in consumer interest in more local and fresher foods, has changed the potential for direct scouring schemes between smallholders and restaurants grow over time to overcome these challenges and deliver positive outcomes for those involved. Overall, scarce evidence exists on the motivations behind engagements in direct sourcing schemes by restaurants in developing countries or on the related outcomes for stakeholders with the exceptions being a study that analyzed the benefits farmers received and their challenges in supplying restaurants in Cambodia (Mao et al., 2014) and another one that examined challenges that a South African resort faced in obtaining a steady local supply from nearby farmers (Rogerson, 2012).
Further understanding of these efforts in developing country are need not only because of the exploding tourism industry in this region but also because of the opportunity that these direct linkages offer to spur rural development (Akama and Kieti, 2007). Indeed, NGOs, the private sector, and governmental economic development agencies have supported these connections to advance rural development goals around poverty reduction and economic growth. These institutions feel an urgency to counter the domination of the externally driven pathways which have characterized food-system evolution in many developing regions as growing evidence suggests that smallholders may not have benefited equally from these strategies, often struggling to connect with export markets (Fernandez et al., 2013; Francis et al., 2003; Holt-Gimez and Altieri, 2012).
The evidence from these efforts points out the difficulty in building strategic alliances, overcoming logistical challenges in getting the product from the farms to the business on time, and getting the pricing right to create win-win scenarios for the farmers and the restaurants (Green and Dougherty, 2008; Telfer, 2000). Our study of restaurants sourcing locally in Cusco, Peru evaluates the areas identified in the literature as critical to the success of these chains including the quality of the logistical, information, and distribution systems (Curtis and Cowee, 2009; Freidberg and Goldstein, 2011; Inwood et al., 2008); the access to natural, human, physical, social, and financial capital (Glowacki-Dudka et al., 2013; Stephens, 2021); and the strength of business relationships, leadership, and skills (Starr et al., 2003; Telfer, 2000). By examining restaurants and suppliers that have had various degrees of success in building these short circuits, we analyze how these factors interact to lead to strengthening or weaking the creation of direct sales relationships. We then examine what needs to be done to better address the challenges faced by restaurants and their suppliers and replicate their successes to bring such efforts to scale.
Study site
Cusco’s long and eventful history from being the capital of the Incan empire to the Spanish conquest, combined with its strategic proximity to Machu Pichu, has made it one of the most popular tourist destinations in Latin America. Even though mining is the largest economic driver in the region, tourism is the second leading industry making up about 12% of the economy in 2017 (Chique et al., 2018). Tourism has been a booming business in Cusco since the 1990s and has continued to explode with the naming of Machu Pichu as a World Heritage Site and the expansion of budget airlines. Indeed, various Peruvian economic development agencies, as well as NGOs have seen this tourist growth as an economic opportunity that if correctly managed with an eye toward sustainable tourism would provide employment opportunities, lifting households, especially rural households, out of poverty (Knight et al., 2017; Rice, 2015). This tourism growth helped ensure that per capita income in the department of Cusco nearly doubled from 2007 to 2017, growing from 2958 USD to 5902 USD in 2007 dollars (Instituto Nacional de Estadistica e Informatica (INEI), 2018).
This growth in tourism to see Machu Pichu and other culturally important sites cannot be disaggregated from a growing boom for culinary tourism in Peru as tourists seek out Peru’s world-renowned local cuisines and restaurants. Peru has been able to create and promote a unique culinary tradition based a rich supply of ingredients from unique Amazonian fruits to a wide diversity of abundant seafood found in the cold waters of the Humboldt current and Andean foods first cultivated by Incan communities and their ancestors. Such products include native potatoes and landrace maize. This variety of widely accessible food products that have been promoted by culinary institutions combined with a diversity of food traditions from pre-colonial times to more recent European and Asian immigrants provide the conditions along with innovative chefs to create a gastronomic delight (Matta, 2014; Wilson, 2011). Even though much of this culinary tourism has been targeted to Lima, which in 2019 had the highest rated restaurant in Latin America and two restaurants among the world’s 50 best, these trends have spread to the rest of country. They are especially prominent in Cusco where tourists have very high expectations for dishes that aspire to Peru’s fame (Gálvez et al., 2017).
This growing demand for Peruvian dishes has also created a boom in the demand for traditional food products as world famous, Peruvian chefs even travel to remote communities including in Cusco in search of the next famous ingredient (Wilson, 2011). Many smallholders in this region grow a range of traditional products, which are suited for the agroclimatic conditions for altitudes between 2500 and 3000 m above sea level. For several of these crops, the market value has increased markedly in recent years (i.e., quinoa and maca). However, overall, poverty in the department of Cusco remains mainly a rural phenomenon. According to the most recent agricultural census in 2013, farms around the city of Cusco tended to be small, averaging 5.5 ha and 59% were oriented to production for self-consumption with the small surplus sold in local markets. Farmers grew most of their products using traditional, low input methods with 61% of these farmers using only organic fertilizers. The farmers in Cusco are primarily from historically marginalized indigenous communities with 83% of farmers speaking primarily Quechua; and 43% were dependent on off-farm income, mainly in the tourism sector, to supplement their farm income (INEI, 2013).
Research design
Restaurant interviews
We employed a multi stage stratified random sampling to ensure we included the broad diversity of tourist restaurants in Cusco. A simple random sample could miss capturing some of the unique restaurants in the selection process (Etikan and Bala, 2017; Singh and Masuku, 2014). From a list of 82 restaurants that were members of the Cusco tourism council (DIRECTUR for its acronym in Spanish). We selected 46 restaurants according to the selection criteria of restaurant category (i.e., one, two, or three stars), type of menu offered, and year established. A third of the interviewed restaurants were in each of the three categories. Nearly half of the restaurants (22) specialized in dishes traditional to Cusco and the other half’s (24) main menu items were of an international flavor. The majority (64%) were only restaurants, 17 of them were combined hotel and restaurant. On average, a sampled restaurant had been in business for 11 years, with six of them having been in operation for 20 years of more and 12 of them for less than 5 years.
A team of two enumerators interviewed the person in charge of sourcing at the restaurants using a semi structured interview guide that had been pretested. One of the enumerators asked the questions from the interview guide, while the other filled out the guide. Following the interview, enumerators compared notes and completed the interview guide, corrected any discrepancies or misunderstandings, and verified the responses. They interviewed the person or persons in charge of sourcing inputs for the restaurant. This team interview approach with pretested interview guides has demonstrated to be effective means to fully capture the interviewees responses (Bechhofer, et al., 1984; Boutain and Hitti, 2006). On average, the respondents had held their position for some 5.5 years, as an administrator, owner or head chef, or logistics manager, with six of the respondents having greater than 10 years of experience. As the restaurants utilized a range of food products, the enumerators collected data on experiences in sourcing various categories of food: fruits, vegetables, dairy products, meats (including alpaca and guinea pig), and roots and tubers. The respondents also identified challenges they faced in sourcing by each of the food categories and supplier. The final section included questions on the restaurants’ direct relationships with local farmers.
Case study analysis
To analyze the sourcing of the local products of the restaurants, we selected three such efforts for case studies. This method is well suited to this type of research, as the limited number of direct sourcing relationships limit the ability to undertake large surveys (Coley et al., 2009; Selfa and Qazi, 2005). We carried out a first phase of data collection from February to April 2016. We interviewed stakeholders, including NGO leaders, local governmental officials, and business owners, to identify interventions that had taken place to facilitate the direct sale of products between smallholders and buyers in Cusco. We gathered information on the products they offered, the intervention period, the people and organizations involved, and possible insights into outcomes and impacts achieved. We identified 10 interventions. Local NGOs and government institutions supported seven while international NGOs and bilateral funding agencies helped establish the other three.
We, then, purposely selected three interventions (Native Potato Case, Greenhouse Horticulture Case, and Specialty Herb Case) that provided a mix in terms of organizational engagement (NGOs, intermediaries, and restaurants), products offered, and local capacities for agroecological production and marketing. This diversity allowed us to analyze how different factors influenced the outcomes of the cases and determine if a specific factor benefited or hindered the success of these interventions. This selection of diverse cases is the fully understand the full range of factors influencing the population (Gerring and Cojocaru, 2016). Once we selected the cases, we interviewed various actors from May through July of 2016 to obtain multiple perspectives on each case. In the Native Potato Case, we interviewed 26 out of the 35 members of the association. All five female members were included. For the Greenhouse Horticulture Case, we interviewed all the 18 members that participated in the effort. The structured interviews included questions on household demographics, assets, participation in productive activities and in the organization, and overall perceptions of each organization. For the Specialty Herb Case, we visited the enterprise to understand how it operates and interviewed the manager, the manager’s assistant, the owner to collect data on the business operation, challenges they faced, and plans.
Results
Restaurants
Sourcing experiences
Percentage of food purchased from different types of suppliers.
Percentage of respondents that reported the following positive and negative aspects of their relationship with their buyers.
Average rating of the frequency (1 = very frequent, 2 = frequent, 3 = sometimes, 4 = rarely, 5 = never) and gravity (1 = very grave, 2 = grave, 3 = somewhat grave, 4 = minor problem, 5 no problem) of difficulties with the current sourcing from intermediaries (n = 46) and direct purchases from farmers (n = 25).
In some cases, the respondents highlighted the difficultly in purchasing “organic” products from local suppliers. In Cusco, “organic” generally implied a product that was locally produced by smallholders with limited use of agrichemicals—few restaurants purchased certified organic products, as there were no certified organic products available in Cusco due to the cost of certification. The responses highlighted the high costs to seek out quality inputs and specialty items, such as herbs, trout, and native potatoes. The issues of informality in business relations (and the limited capacity of local sellers of food inputs to provide a purchase invoice—which requires that sellers be formal businesses certified with the tax authorities) was also a frequently mentioned challenge. Where respondents identified bottlenecks not related to sources, these tended to deal with lack of physical capital (e.g., refrigeration capacity and meat packing). Five restaurants reported no bottlenecks. In some cases, they highlighted how the expansion in the number of local intermediaries allowed them to acquire inputs with less effort than in the past.
Direct sourcing
At the time of the interviews, most of the restaurants, 25 (54%), have had a direct sourcing relationship with 20 distinct local suppliers between 2011 and 2016. There were 34 such relationships as seven restaurants had two or more such relationships. Of these relationships, 10 (20%) lasted 6 months or less, 19 (56%) lasted from 7 months to 2 years, and 5 (15%) lasted over 2 years. The respondents classified 2 (6%) of the relationships as being very close, a partnership, 17 (50%) as being somewhat close, a friendship, and 15 (44%) as being distant. The restaurants mentioned that the quality of the products offered, on time delivery, and good communication were the key factors in developing and maintaining the closest relationships.
Overall, the respondents demonstrated an interest in sourcing directly from nearby producers, whether that be a single producer, a producer association, or other enterprise. They believe such relationships allow them to source fresh, higher quality goods. However, the challenges faced in maintaining these relationships especially the lack of business skills of the enterprises sourcing the products limited the duration of these relationships. They stated that the failure to complete orders, delivering the wrong or inadequate amount of a product, and inability to provide legal invoices were the primary factors that limited further strengthening direct purchasing arrangements. Of the restaurants that did not have a direct sourcing relationship, all but one of the restaurants said they were interested in starting one, especially to ensure the sourcing of fresh produce. However, their limited of knowledge of who to contact and time to search out these contacts hindered their ability to establish these relationships.
Case studies
Native potatoes case
In 2001 a local NGO with support from the local government and the national agricultural research institution (INIA for its acronym in Spanish) implemented a project to conserve the genetic diversity of native potatoes with 140 smallholders located in eight communities. After some success with native potato production, the growing demand by restaurants for them encouraged these actors to facilitate market outlets for surplus production. In 2003, the local NGO received funding to establish a farmers’ association to sell the potatoes in local markets and restaurants in Cusco, with 45 farmers making the first sales to a gourmet restaurant in Cusco in 2005. By 2008, all 140 farmers participated in the association and five new restaurants were added to the client list. However, as funding evaporated in 2010, the NGO withdrew its support, and only 47 farmers from the two communities closest to Cusco maintained their engagement with the association.
Before these direct markets were established, the 35 farmers interviewed for this study did not receive a higher price in the market in Cusco to compensate for lower productivity of native potatoes vis-a-vis hybrid potatoes. A 74-year-old female member pointed out that, “Before [the intervention] we sold native potatoes at a very low price. Very few people bought native potatoes.” At the time of the interviews, these farmers earned three times more for the sales of their native potatoes to the restaurants than they did for selling hybrid potatoes to local intermediaries (1.80 USD/kg for native potatoes compared to 0.60 USD/kg for hybrid potatoes). These market opportunities allowed for the sale of native potatoes to be the most important income source for 50% of the interviewed households and the second most important for an additional 19% of households. A 35-year-old male member of the cooperative mentioned that, “the sale of [Native potatoes] allowed me to pay for my children’s education.”
Even though the members of the association were able to earn higher prices from their sales to restaurants, they continued to depend on the local markets to sell the potatoes. Nonetheless, sales through the farmers’ association were the most important market for these households: 58% of households rated sales to the association as being either important or very important to their marketing native potatoes compared to 54% that gave the same rating for local markets and 38% in regional fairs. Nonetheless, 29% of the farmers indicated that a lack information such as in how to control diseases, was an important factor that hindered their ability to expand/intensify production, as the NGO that had helped them establish the organization no longer had funds to provide this service. The limited access to capital such labor, credit, and land were additional factors that inhibited the expansion of the farms (Figure 1). Percentage of households that identified the following factors as limiting their ability to expand native potato production.
Although participation in these new markets for native potatoes greatly enhanced rural household incomes, the organization failed to build strong business relationships. It was unable to expand its clientele beyond six restaurants; each of which only purchase a few kilograms of native potatoes in any 1 week. These weak business relationships created a vicious cycle as they hindered the consolidation of the organization. There was little willingness on the part of the smallholders to expand the organization, as sharing their limited market access would dilute the market for current association members. The organization would not be able to meet increased demand due to the lack of social capital in the organization. The leaders of the association failed to keep the members well informed about meetings, trainings and finances (i.e., details of sales and prices paid by the buyers). In fact, 42% of farmers interviewed said they rarely received information from the association. This lack of communication had motivated some members of the association to be skeptical of the leader. One 40-year-old male, farmer complained, “I am not as dedicated to the production of native potatoes as I used to be because the association is going bankrupt. There have been problems with the directors. They only look out for their own interests.”
The association was also unable to market other products the farmers grew, particularly vegetables, which were sold locally in informal markets. The logistical and infrastructure (i.e., lack of refrigeration) challenges were too difficult to overcome to enter this market. An established intermediary in Cusco attempted to purchase vegetables from the association; however, the association had no way to effectively transport the goods to the intermediary’s warehouse. Moreover, there was little interest from the association’s current clients to purchase additional products and to lead efforts to develop this short chains. Under the current arrangement, the businesses demonstrated their support for the rural communities, which was important in their marketing to attract socially conscious cliental, without the complications in developing networks and logistics for the direct purchase of fresh produce.
Greenhouse horticulture case
In 1998, an international NGO began an effort to improve vegetable production through the installation of greenhouses for production of horticultural crops. Given Cusco’s high altitude, and the possibility of sudden and severe cold snaps, greenhouses were critical for smallholders to grow horticultural crops throughout the year. The NGO recognized that in addition to producing vegetables, the farmers would need to consider options for marketing these vegetables. In 2011, the international NGO handed the effort over to a local NGO that focused on finding buyers for the greenhouse vegetables. The local NGO engaged with a major multi-national fast food restaurant interested in securing local sources of greenhouse lettuce. The NGO focused on training the 18 participating farmers in best practices, especially in meeting stringent quality standards. When this last phase ended in 2016, the smallholders continued to supply the restaurant and a specialty intermediary, who supplied several restaurants in Cusco with strawberries. The farmers sold their surplus production in a regional farmers’ market.
Many of the smallholders claimed that the income from selling to local restaurants improved their financial capital so that they could invest in physical capital, expanding or building new greenhouses, constructing irrigation systems, and the purchase better quality inputs. The greenhouses provide these farmers with a consistent, year-round income and food source. They were motivated to participate because of the price premiums received; 94% of the smallholders admitted that they received higher or much higher prices through these direct sales to the restaurants than they did through local markets. However, they had to wait several days for payments and either had to have a bank account to receive electronic transfers or visit the business several days later for a check, which strained their business relations with the restaurants. This wait was a challenge for many smallholders who needed immediate payments to pay harvest costs. A majority, 59%, of smallholders found the delay in payments to be intolerable or to be greatly affect their household finances. At the time of the interviews, the farmers were concerned about one client, who had recently had a change in management and had yet to pay them for a delivery made 2 weeks prior. One 58-year-old male farmer mentioned that, “Getting paid for my vegetables has been very complicated. I had to visit the business to receive my payment and sometimes they do not pay me that day. I waste my time and bus fare [to travel to Cusco].”
The households have become very dependent on the sale of products grown in the greenhouses. Vegetables, fruits, and flowers from greenhouse production were either the primary or second most important income source for all the households. Nonetheless, their lack of marketing skills and strong business relationships meant that sales from the greenhouses were not as beneficial economically to the few households that participated in the intervention, as they would have hoped. They were not able to sell all their products in these lucrative markets, include additional restaurants or expand membership. Only 39% of households sold the majority of their products through this marketing network. Members rotated filling the orders so that any particular farmer only made a sale once a month. The product that smallholders did not sell to the restaurants was sold in local markets often at a discount of a quarter or third. Several, 22%, of households stated that the limited market access limited their financial capital and, thus, their ability to invest more in their greenhouses. Still, 89% of households planned on investing in their greenhouses, by expansion or improving their irrigation systems. However, due to a lack of information they were unaware how to implement the best production practices. They were concerned they would be unable to maximize the potential of these investments. Also, because of limited human capital, the farmers mentioned that they lacked the labor to cultivate additional land; 56% of the households stated that time constraints were one of the top three factors that limited their ability to expand their greenhouses (Figure 2). Percentage of interviewed households that identified the following factors as limiting their ability to expand native potato production.
The farmers built themselves a reputation of consistently meeting quality and safety standards for over 5 years, which strengthened their business relations. Because of this rapport, the manager of the restaurant that was its primary buyer was helping the organization look for opportunities to supply other restaurants in Cusco. They were also successful in developing a partnership with a specialized, local intermediary that seeks out high-quality products to supply tourist restaurants in Cusco. He was encouraged to buy from these smallholders not only because of the quality of their products and their completion of strict safety standards but also because he could trace the products back to the individual farmer, a characteristic desired by high-end restaurants.
Such a reputation was built through strong social capital with the farmers working together to consistently meet their buyers’ needs. Three farmers pointed to the importance of coordinating their sales as a group rather than individually in order to secure higher prices. “We must … work together to not compete with one another to supply a client,” said a 39-year-old female farmer. The price premiums and access to lucrative markets was a very important motivating factor in the farmers’ commitment. In fact, 89% of the farmers said they were active or very active in the organization, the same amount that was active when they established the organization. The leadership kept the farmers well informed about sales and activities.
The main challenge the smallholders faced in growing their business was following Peruvian tax laws. The farmers felt that they had not been properly trained and lacked information on how to meet these requirements. They pointed out that they had to pay a large fine when they did not submit tax forms on time and correctly register their sales, yet they were still unsure of what error they had made. The one farmer that left the network decided to do so because he did not want to pay the fine. The farmers also mentioned the need to look into developing relationships with other business (i.e., two new supermarkets in Cusco) in order to sell more of their product at these higher prices and expand their product offering as their customers have been asking for additional crops besides their current offering of lettuce and other leafy vegetables and strawberries. One 59-year-old female pointed out, “We need to access new markets. There are few sales when the harvest is at its peak.”
Specialty herb case
In 2007, a local NGO, in coordination with restaurants, organized 20 farmers to produce fruits and vegetables for restaurants in Cusco. The association supplied 10 restaurants with limited products the first year, 2008. For the next 2 years, it failed to deliver products when promised due to a lack social capital in the farmer organization. Several farmers were unwilling to grow vegetables during the holidays, when demand for the restaurants his highest. Faced with dwindling funding, the NGO also ceased its support for the association and the farmers were unable to assume the intermediary role that the NGO had performed. With an aim to ensure continuity of the supply of these important crops, the owner of a consortium of restaurants in Cusco took over the organization in 2010. The consortium bought out the farmers and consolidated the farm to source the products they needed. By 2016, the farm had expanded to supply 29 restaurants in Cusco that are in addition to the six restaurants that are part of the consortium.
The farm provided an important income source to additional rural households. It employed 12 people from the rural community where it was located and was looking to hire additional workers as the business expanded. What distinguished the farm from other employers was that it enhanced the human capital in the area by providing employment opportunities for professionals (agronomists, an account, a business manager, and a food safety expert) to work in this rural community. Working on the farm provided these professionals with hands on training in business management, marketing, and relatively advanced agronomic practices. The organization also made a particular effort to purchase from nearby smallholders to help fill the demand for particular goods. The manager bought edible flowers from three local farmers monthly providing them with access to these more lucrative markets. The manager also attempted to purchase fresh vegetables from the farmers in the Native Potato Case. Even though the owner of the farm and the director the NGO that established the original farmers’ association expected business to provide a steady income source to the community, the farm has only been able to benefit a few households. The farm has only been successful in establishing business relationships with three nearby smallholders.
In order for the farm to produce delicate vegetables, flowers, and herbs, the owner invested in specialized physical capital (i.e., greenhouses, drip irrigation, cold storage, and processing facilities). Throughout any given year it offered 90 products with 42 offered at any one time, it faced many challenges in being able to increase production. Even though the manager hired as many students as possible from the technical training program supported by the local NGO that founded the enterprise, he was still had challenges with adequate human capital. Unable to find enough qualified workers, especially during harvest. To increase production, the farm needed a computerized irrigation system and improved composting facilities. However, banks were hesitant to issue the business credit because of the uncertainty of the risk in such an innovative business. In order to raise the needed financial capital, the owner was considering seeking outside investors including other restaurants in Cusco.
Although the business sees a demand for organic produce, the legal and policy environment hindered the ability of the farm to exploit these opportunities and expand its production. In particular, the farm faced difficulties in sourcing organic seeds for specialty crops. The manager had to import many of these seeds from the United States, which can cost up to 4 USD per seed because of the additional transactional costs of shipping and paying the Peruvian custom fees. The manager also indicated that there was a lack of information on raising organic crops due to little support from the agricultural ministry. He claimed that the extension system focused on conventional production methods that rely on agrochemicals and was geared to the production of export crops, such as quinoa and avocados, and not for products for the local market. The agronomists that worked for the business felt that they had no one to turn to for advice for organic solutions to disease or pest infestations or in helping develop better techniques to produce organic fertilizer.
An indication of the enterprise’s success was its strong business relationships which lead to its inability to keep up with demand. One of the principal clients of the farm pointed out that he would like to source all his products from it due to the freshness of the locally produced vegetables and herbs and lower transportation cost. However, the restaurant was only able to source 70% of its needed vegetables and herbs from the business; the rest came from Lima. Either it does not produce enough at the time that the product is required by the restaurant, or it does not produce the desired vegetable or herb. To spur this demand, the manager made efforts at maintaining open communication with the business’ clients about when products were available and delivering the products directly to the establishments on set days during the week. The management also developed an online catalog to display the vegetables and herbs that it offers; sent out monthly emails with a list of products, prices, quality available, and any special offers; and accepted electronic orders. The business constantly updated its product offer to keep up with food trends by taking product recommendations from its clients. Of particular importance were connections to a restaurant in Lima, where food trends often emerge before spreading across the rest of the country.
The manager pointed out that five chefs from the most elite restaurants in the city were especially stringent in their requests. They demanded high-quality products, based on taste, color, smell and texture, which were hard to meet due to increasing climatic variability. These chefs also desired organically certified products. However, organic certification, at a cost of 1000 USD, was too costly for the farm. As there were no organically certified products in the markets in Cusco, the chefs had nowhere else to turn. Rather than having certification, the owner allowed the chefs to visit the farm anytime to verify the production systems utilized, which all the chefs commented that these visits provided them with confidence in the product. The owner of the farm mentioned that “If they [the restaurants] want to purchase from us they will. If they require organic certification, let them go find someone who will provide it, which I know they will not be able to find.”
Discussion
This study demonstrated that establishing direct sales between local famers and tourist restaurants in middle-income countries like Peru could foster rural development by providing new jobs and enhanced income for smallholders through access to lucrative local markets. At the same time, such relationships have the potential to provide restaurants with access to quality food products that is highly sought after by its patrons. However, those promoting such direct sourcing relationships should proceed with caution as what may seem as an easy and obvious win-win solution has proven difficult to achieve at scale. Achievements were restrained, even in a tourism-dependent city like Cusco with a burgeoning culinary scene. The production enterprises struggled to move beyond a few restaurants to source a larger population. Only a handful of farmers and workers benefited in any one case. Many restaurants faced difficulties in maintaining these business relationships often with the sourcing arrangement lasting only a few months. The interventions were small in scope with a few farmers supplying a few, normally just one, large business. There has been little innovation in these relationships. The restaurants waiting for the farmer to deliver the products. They did not take leadership in developing these relationships or innovating in intermediation. The implications are clear; limited ability for the suppliers to engage and expand their operations, both in terms of buyers and products sold. Research has discussed the long and unpredictable pathway for smallholder business organizations in Latin America and beyond to grow into viable business operations (Donovan et al., 2017). Direct sourcing that hinges on the capacity of remote, newly organized smallholder businesses are at relatively high levels of risk to stagnation, or in the worst case, failure over the midterm. This reality can only change through a different type of engagement.
The NGOs and governmental agencies involved in creating these relationships focused their activities on improving smallholders’ production capacity. They tended to pay less attention to improving smallholder organizations’ business skills (i.e., management, marketing, group coordination, issues receipts and fulfilling tax laws, obtaining food safety certifications). They did not collaborate with the restaurants to determine these needs and address them. The production enterprises’ weakness in these skills and developing business relationships was the principal factor listed by the restaurant managers as limiting their ability to engage further with these local suppliers. This skill set have been shown to be necessary to build sustainable business and build strong business relationships (Blare and Useche, 2014; Donovan et al., 2017).
Access to financial capital was a particular barrier to the suppliers, limiting their ability to expand and provide the restaurants with additional products and better services. The lack of credit was a challenge that has no quick solution and has been primary limiting factor for rural enterprises (Liverpool and Winter-Nelson, 2010; Teye and Quarshie, 2021). The producer enterprises in the cases also failed to get co-investment from restaurants and processors in communication, transportation, technical assistance, and cold storage infrastructure needed to expand these connections. The ability for restaurants to purchase nearly all their fresh food needs from a single intermediary is simply too attractive for them to consider deep engagement with nearby smallholders who would only be able to supply a small number of the various foods needed for their operations. This type of private sector, co-investment is necessary but has been a struggle for strengthening local food-systems and direct marketing programs throughout the world (Allen, 2010; Crosby et al., 2021). Additionally, shortages in human capital, qualified labor limited the ability to expand and is a complaint from many smallholder enterprises as they produce food products that require greater technical skills (Carroll and Kinsella 2013). Many of these challenges could have been overcome through a better endowment of social capital enhancing cooperation in the farmers’ organizations and buyers (Glowacki-Dudka et al., 2013).
The challenges that the restaurant managers and producer enterprises faced in developing these direct sourcing relationships reflect those presented in earlier studies. The restaurant managers were challenged by the poor logistical and distribution systems backing similar findings by Inwood et al. (2008) and Freidberg and Goldstein (2011). The political and institutional environment makes establishing these distributional channels more difficult when they do not support these direct sourcing relationships, such as implementing a streamlined tax and regulatory regime (Kuyvenhoven, 2004). Smallholders faced difficulties in gaining access to pricing and particularly production information. Lack of pricing information has been well documented as a barrier to smallholders’ deeper engagement in markets both in developing local systems (Curtis and Cowee 2009; Kocho et al., 2011) and beyond (Haile et al., 2019; Milligan et al., 2011). The adequate provision of technical assistance and extension services are critical for smallholders to not only reach their potential yields and produce the highest quality products (Davis et al., 2014; Ferris et al., 2014; Ito et al., 2012).
Disaggregating these various barriers to further scaling and determining, which ones to address first or concurrently needs to be carefully considered. For instance, poor business relationships lead to fewer sales and the lack of income to invest in production and greater variety of products. Without a better product selection, restaurant managers are hesitant to make direct purchases. Because of this interrelationship, collaboration between public sector agencies, researchers, NGOs, and the private sector is needed to identify and test alternative forms to aggregate and market smallholder production; to incentivize more local restaurants (and other types of buyers) to activity engage in the construction of local food chains; and create policies that support these relationships (Bloom and Hinrichs, 2011; Freidberg and Goldstein, 2011).
Rather than developing entirely new marketing mechanisms opportunities may lie with existing markets and actors (i.e., intermediaries, restaurants, and processors). Marketing, logistical, and legal requirements can only be met through the support or leadership of the restaurants and the rest of the private sector, as farmers may not have the capabilities to meet these expectations. Creating a single sourcing enterprise similar to food hubs in the Global North, with the proper receipts, would lower coordination costs (Berti and Mulligan, 2016). Such an effort would also require a structured communication framework to ensure that the production systems are nimble enough to change products to developing food trends. Although there maybe concern about the margins that intermediaries may capture in these lucrative sales, a single entity or intermediary with coordinated marketing and logistics could offer all the products from each of the enterprises while provide the restaurants with a high-quality product that satisfies its customer’s needs while expanding income generating opportunities for smallholders
Footnotes
Acknowledgments
We would like to thank the McKnight Foundation and the CGIAR Program in Policies, Institutions, and Markets (PIM) for funding this research. We also thank the participation of our partnering institutions in Cusco the Centro Bartolome de las Casas (CBC), Centro Guaman Poma de Ayala, and Arariwa. We owe a debt of gratitude to Giullany Morales, Virginia Caceres, Nelida Huillcanina, Higidio Ortega, Cesar del Pozo, and Esther Guzman for collecting secondary data, conducting the interviews, and building the databases.
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by McKnight Foundation and Consortium of International Agricultural Research Centers.
